Monetary Policy with Foreign Currency Debt

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Monetary Policy with Foreign Currency Debt

Author Info

Philippe Bacchetta () (Study Center Gerzensee, Univeristy of Lausanne, and CEPR)

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Philippe Bacchetta

Abstract

A major feature characterizing recent currency crises in emerging markets has been the large proportion of private foreign currency debt. This feature has made the conduct of monetary policy particularly difficult. This paper proposes a simple model to better understand these issues where firms are credit constrained and the currency denomination of debt matters. I argue that the recent financial crises are well explained by such a model. In this framework, monetary policy can be ineffective since the interest rate and the exchange rate channels of transmission of monetary policy go in opposite directions. This potential ineffectiveness should be taken into account in the choice of a monetary or exchange rate regime.

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Publisher Info
Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 00.03.

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Length: 38 pages
Date of creation: Feb 2000
Date of revision:
Handle: RePEc:szg:worpap:0003

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This paper has been announced in the following NEP Reports:

NEP-ALL-2000-08-26 (All new papers)
NEP-MON-2000-08-26 (Monetary Economics)

Cited by:
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Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
Other versions:
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "A Corporate Balance Sheet Approach to Currency Crises," CEPR Discussion Papers 3092, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A corporate Balance-Sheet Approach to Currency Crises," Working Papers 01.05, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November. [Downloadable!] (restricted)
Olivier Jeanne & Charles Wyplosz, 2001. "The International Lender of Last Resort: How Large is Large Enough?," NBER Working Papers 8381, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Jeanne, Olivier & Wyplosz, Charles, 2001. "The International Lender of Last Resort: How Large is Large Enough?," CEPR Discussion Papers 2842, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Olivier Jeanne, 2001. "The International Lender of Last Resort: How Large is Large Enought?," IMF Working Papers 01/76, International Monetary Fund. [Downloadable!]
- Olivier Jeanne & Charles Wyplosz, 2003. "The International Lender of Last Resort. How Large Is Large Enough?," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 89-124 National Bureau of Economic Research, Inc. [Downloadable!]
Stéphane Colliac & Nader Akmar, 2005. "A primer on the empirics of original sin," Economics Bulletin, Economics Bulletin, vol. 6(23), pages 1-12. [Downloadable!]
Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," RES Working Papers 4205, Inter-American Development Bank, Research Department. [Downloadable!]
Other versions:
- Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
Nicolas Berman, 2009. "Financial Crises and International Trade: The Long Way to Recovery," Economics Working Papers ECO2009/23, European University Institute. [Downloadable!]
Olivier Jeanne & Jeromin Zettelmeyer, 2003. ""Original Sin," Balance Sheet Crises, and the Roles of International Lending," IMF Working Papers 02/234, International Monetary Fund. [Downloadable!]
Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "¿Por qué los países tienen los regímenes de cambio flotante que tienen?," RES Working Papers 4206, Inter-American Development Bank, Research Department. [Downloadable!]

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